The Productivity Commission wants to see those who benefit from new developments pay for the infrastructure needed. Photo: Lynn Grieveson

In today's email, we dive into the Productivity Commission's report on urban planning, and examine why the accommodation supplement needs to change.

1. Weaponising rates to target land bankers

The Productivity Commission's final report on Urban Planning is out this morning and contains a raft of recommendations aimed at improving Resource Management and Planning -- specifically to make it easier to build houses in and around cities.

The key takeaway is around the use of targeted rates on unimproved land values to help fast-growth councils break out of their infrastructure funding Catch 22 situations. These targeted rates would also encourage land bankers to get developing.

The Commission also recommended the creation of a trigger mechanism to force Councils to release land when the gap between rural and urban land values gets too wide.

2. Capturing the value uplift

Productivity Commission Chairman Murray Sherwin told me in an interview that a targeted rate was one way to capture the uplift in the value of land created by rezoning and infrastructure development.

"Council rolls out some infrastructure and the price of the land is uplifted, and council claims some of that back, and one way to do that would be by targeted rates, to say that you are going to get a benefit out of this infrastructure, and we think you'll want to pay for a bit of it," Sherwin said.

"The basic drive though here is we need to get some closer congruence between increased population and increased revenue flow because right now we've got this situation in our fast-growing councils where they're saying 'growth doesn't pay for itself'," he said.

"They're saying 'our revenue doesn't seem to be as responsive to growth as the infrastructure needs are', and we just need to find some mechanisms that get a tighter linkage between that growth and the revenue increases so that they are able to fund the infrastructure that is required and generally the beneficiaries of that -- the newcomers -- should pay for it.

"If you could get that running a whole lot better then you're also more likely to have the supply more responsive to demand."

3. Competitive land markets

Another newer idea developed in the report is around creating competitive land markets that encourage developers to build the underlying infrastructure.

This idea is based on the Municipal Utility Districts or MUDs used in the United States to create competing and privately-run development areas that build their own infrastructure and raise their own debt to pay for it.

The idea is developed in Chapter 12 (from page 351).

"Competitive urban land markets would disrupt a well-entrenched trio of forces currently sustaining and increasing land and house prices," the Commission writes.

"Those forces are land-use plans that allow only incremental geographic expansion of cities, council infrastructure providers who want to keep costs low by only expanding their existing networks incrementally, and landowners at the fringe and beyond who hope for large capital gains," it says.

The Commission raises several options to address the funding and succession issues around creating these autonomous communities. I'll take a deeper dive into this idea at a later date.

It also reinforced the need for Urban Development Authorities, which the Government is already pursuing after recommendations in earlier Commission reports.

And it chose the option from its draft report of creating a single piece of resource planning legislation that deals with the built and natural environment together, rather than having separate acts.

4. Auctioning development rights?

The other new idea in the report that could shake the development community up is the idea of auctioning development rights.

Sherwin talked about how Mission Bay had only two high rise buildings. If a community only wanted a certain number of buildings, the right to develop those could be auctioned off to developers.

"The auctioning of development rights has the potential to regulate density (eg, by increasing the number of multi-storey apartment blocks in an area up to a desired limit) and provide revenue to fund associated infrastructure costs or additional amenities to “compensate” affected communities," it wrote.

5. Have a chat to the ratings agencies

One big theme of the report was the big restraint on the ability of fast-growth councils to raise more debt to fund infrastructure because of their high debt levels and the risk of credit rating downgrades.

The obvious example is Auckland Council, which is near its revenue to debt limits and would have to put up by rates by one percent a year for every notch of credit rating downgrade.

The Commission proposed looking at ways to put debt on other entities' balance sheets -- in particular private ones -- or trying to convince the ratings agencies to allow more debt for higher growth councils.

"There's a probably room for a more substantive conversation with them about the nature of the risks and what capacity there is there," Sherwin said.

"If we can get a closer relationship between population growth and revenue growth for the council, then you would expect them to be able to carry a bit more debt and have the capacity to deal with it effectively," he said.

Sherwin was also sceptical about the ability for central Government to raise the debt for infrastructure bonds for local infrastructure, given ratings agencies often moved quickly to consolidate the debt into their calculations for local government debt -- given the underlying assets would eventually move into the local government's operations.

6. 'Trust and confidence between adults'

The Commission's core theme around infrastructure funding was addressing the tension between the benefits of growth going to Wellington in the form of GST and tax revenues, while Councils had to fund the infrastructure needed for growth from rates on capital values.

It proposed councils such as Auckland and Hamilton move back from rating capital values to rating land values, but it also addressed the reluctance of Wellington to share those revenues with Councils.

Sherwin said it was a trust and confidence issue that needed to be dealt with.

"Central Government is just very sceptical about local government and its capacity to manage," he said.

"A lot of the reasons they've been reluctant to give the a greater slice of revenue in any automatic form is a concern that it's simply going to be spent on the nice-to-haves rather than the bits that they regard as essential. There's a trust and confidence element floating around in all of this, in the relationship between central and local."

"We've spent quite a lot of time over two or three different inquiries just saying, it's time for adults to begin to behave better here."

7. Changing the Accommodation Supplement

Shane Cowlishaw takes a deeper look here at the discussion going on in the current Budget Round about whether and how to change the Accommodation Supplement.

It hasn't been changed for a decade. But how do you fix something that is “hamstrung”?